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Understanding Earnest Money

When you are buying or selling rural land in Alabama or Mississippi it is helpful to understand what Earnest Money is and how it works. You are in the process of negotiating an acceptable purchase price or sales price on a piece of land, and while completing the contract there will inevitably be a question about how much earnest money is deposited.

What is Earnest Money? This is a demonstration in good faith of the sincerity of the purchaser to follow through with the transaction. These funds are usually submitted with an offer to purchase a piece of real estate or very shortly after the written offer is presented.

How much Earnest Money is Required? The amount of money that is to be deposited is negotiable between buyer and seller. Generally speaking a stronger deposit will accompany an offer that shows the prospective purchaser is serious. I have seen accepted offers with no earnest money and some with as much as 10% of the purchase price on deposit. Typically I suggest that we hold 2% to 3% of the purchase price as earnest money.

What happens to the Earnest Money? Generally earnest money comes in the form of personal check along with a contract. When all parties to the contract have fully executed it (and only then) the earnest money is immediately deposited into the broker’s escrow or trust account. The buyer and seller may opt to allow either listing or selling broker to hold the funds. If a land transaction goes as it should, then at the closing the earnest money is applied to the purchase price of the property. If the transaction does not go as smoothly as it should, then the earnest money may or may not be refundable depending on the terms of the contract and who is in breach of those terms.

What is a Mutual Release? In the event a land transaction is not consummated as it should and there are earnest money funds on deposit with Southeastern Land Group, both seller and purchaser will be required to sign a Mutual Release form that allows us to disburse the funds at the written direction of both buyer and seller. Without this signed written agreement from both parties, we cannot release the funds from escrow.

This article is meant to be an introduction to the concept of earnest money and how it typically works, and should not be considered legal advice. If you have specific questions about how earnest money works or how a related dispute should be handled, then you should seek the advice of a legal professional.

Written by Jonathan Goode Accredited Land Consultant (ALC) and licensed Broker in AL and MS